Gold and Silver Trading Alert: Dollar Rallies, Gold Declines

In short: In our opinion short positions (half): gold, silver, and mining
stocks are justified from the risk/reward perspective.

The entire precious metals sector declined yesterday, even gold. Has the situation
changed enough to double the short position? Let's take a closer look (charts
courtesy of http://stockcharts.com).

Miners once again moved lower by more than 1% and the volume - while still
not huge - was higher than on the previous day. Increasing volume during a
downswing is a bearish sign, especially that the day before the decline started
we had seen a move up on tiny volume.

Miners moved below the October 2013 high, but they did not move below their
previous local low (the most recent one) and back below the 50% Fibonacci retracement
level. The situation is bearish, but it doesn't look that it deteriorated.

Gold moved lower on relatively high volume, which is a bearish sign. We also
saw another sell signal from the RSI and Stochastic indicators. The situation
on the above chart has clearly deteriorated, but the move lower has not been
significant enough yet to make the situation extremely bearish.

The situation on the currency markets remains unchanged. The Euro Index
is likely to decline based i.a. on the long-term declining resistance line
that was recently reached, but not broken.

Even if we had assumed that there was a small breakout above the declining
resistance line, it would have been invalidated yesterday. The short- and medium-term
implications are bearish for the Euro Index and for the precious metals market.
They will become stronger if we see continuation of the decline in the former.

As one might have expected, a decline in the Euro Index meant a move higher
in the USD Index. That's not a surprise as the US Dollar was right at the medium-term
support line and was likely to move higher once again shortly. Quoting Tuesday's
alert:

The medium-term USD Index chart suggests that we are still likely to see
much higher USD values. The index is right at the long-term (or medium-term
depending on one's approach) support line and after a breakout. It's an index
just waiting to start a big rally. A rally in the USD Index to the 85 level
or so would likely have a devastating effect on the precious metals market
and this type of rally could be seen based on the above chart.

If the USD really rallies and gold refuses to decline, then we will be
happy to conclude that the medium-term decline in the precious metals market
is probably over. It simply doesn't seem to be the case just yet.

The above remains up-to-date.

In Monday's alert we commented extensively on the juniors' outperformance
and its implications. We summarized that it was not necessarily a bullish sign
and that the last 4 years' performance suggested that we were approaching a
local top. We also wrote that the sell signal from the Stochastic indicator
would be an important event - we wrote that a sell signal from Stochastic
could actually trigger a decline on its own in the current state of the market.

We have just seen this signal, so the situation has further deteriorated from
this perspective.

Last but not the least, we would like to discuss the situation in the silver
market. We
previously wrote about the 50-week moving average that was likely to keep
the rally in check. Yesterday, silver invalidated a small, unconfirmed breakout
above this resistance and at the same time moved back below the 2008 high.
The bearish implications of these events will be much stronger if silver closes
the week below these levels, but the outlook deteriorated somewhat based on
yesterday's price action anyway.

Also, please note that the volume is already quite significant for this week
even though only 3 trading days have passed. Silver is declining this week,
so this is a bearish indication.

All in all, we can summarize the situation by writing once again what we wrote
yesterday: with the currency market being a major (!) threat to the precious
metals market's rally and indications that this market will move lower at least
in the short run, we think the short positions are justified. The situation
has deteriorated somewhat based on several signals, but it doesn't seem to
become extreme enough to justify doubling the short positions just yet.

Please note that we have started to include the insurance capital on the above
list in order to avoid the impression that we suggest being entirely out of
the precious metals market. Those of you who have been with us for a long time
are well aware of this, but since a lot of new subscribers have joined us recently,
we though a quick reminder should be useful.

We have expressed our opinion regarding being out with one's long-term investment
capital, but being in as far as the insurance capital (physical precious metals
holdings) is concerned. You will find details on our thoughts on gold
portfolio structuring in the Key
Insights section, but in short, it depends on your approach and experience.
Below you will find a "portfolio" that we created for Eric - the fictional
character that we use to illustrate suggestions (not investment recommendations)
for beginning investors. More precisely, this was the portfolio before we suggested
moving out of the precious metals market (so, before April 2013).

Now the "investment" category would be 0%, but the insurance remains at 44.1%.
Please note that the average size for the trading position (we provide the
netted amount in the above points regarding positions / trades) is just 1.4%
of the entire capital in this case, so half of the position means using just
0.7% (11.8% is kept in cash / dedicated to trading but only a part of it is
used for each trade). The entire portfolio report provides also 2 other fictional
characters and their "portfolios". John being the proxy for an experienced
investor is the other extreme (Eric being the beginner). He "has" 17.6% in
insurance capital and the average size of his trading position is 31.6% (half
of which is 15.8%).

The bottom line is that if you assume that precious metals have much further
to go (beyond 2011 highs) like we do, having just some money in the sector
might appear as being out - and opening a small speculative short position
in addition to it might seem as betting against it. When one looks at it from
a "fresh perspective" without any assumptions about the gold bull and reads
about shorting, they might get the impression that we suggest being entirely
out of the market, which is not the case. Actually, the netted effect of small
speculative short positions is simply hedging the insurance capital to a smaller
or greater extent. It might be more than that if we suggest doubling the size
of the short position, but that's not the case just yet. Of course the above
is not an investment advice and consulting an investment advisor before taking
action regarding your portfolio is encouraged.

Thank you.

As always, we'll keep our subscribers updated should our views
on the market change. We will continue to send them our Gold & Silver Trading
Alerts on each trading day and we will send additional ones whenever appropriate.
If you'd like to receive them, please subscribe
today.

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
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Radomski, CFA and his associates do not guarantee the accuracy or thoroughness
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